Market crises and macroeconomic recessions typically create fertile ground for value stocks to outperform in a recovery.
US small-cap value stocks have enjoyed considerable success since value stocks began to outperform growth in October 2020.
Small-cap US stocks rebounded sharply in the fourth quarter. Yet the recovery may still be in its early stages—particularly for smaller-cap value stocks—as pandemic risks recede and earnings drivers kick in during 2021.
Value stocks have underperformed in the coronavirus crisis. Yet some higher-quality companies are now trading at valuations that underestimate their ability to withstand shorter-term stress—and their longer-term recovery potential.
So as we stand today, the opportunity in value stocks is quite significant. The spread between value and growth stocks is as wide as it’s been at any point in the last almost 20 years.
Value investing has always been about challenging the consensus—but never more so than today. After several tough years, we’re seeing signs of a value recovery brewing. Yet fresh approaches are needed to capture the potential in today’s complex markets.
As trade tensions escalate, investors are flocking to stocks of smaller US companies, which rely less on foreign sales than their large-cap peers. But in some industries, tariffs could affect smaller companies in unexpected ways.
As concerns about inflation spread, it’s time to gauge how different types of stocks will respond. Smaller companies in niche markets may be better positioned to cope with rising prices—especially in consolidating industries.
Though the “Trump bump” helped, the year-old winning streak in smaller stocks owes far more to the spirited US economy. This rally has firepower, but we’d be choosy in riding the next leg higher.
Some of Donald Trump’s plans for the US economy may provide a big boost for small stocks. We think there are five compelling reasons for investors to take a closer look at this segment of the market.